Today I want to show you three funds that are very unusual in a way that means a lot to many people: all three are free from a management fee perspective.
In fact, these three funds – closed-end funds (CEFs), to be precise – are more than free: they have negative administrative costs!
What do I mean? Well, usually index funds sell themselves for being cheap. Fees on the Vanguard S&P 500 ETF (VOO), for example, there is only 0.03%, or $300 in annual fees for every $1 million invested, in other words.
There are even funds out there that cost nothing, like the Fidelity ZERO Total Market Index Fund (FZROX)which has no expenses at all.
Sounds appealing, right? Well, not so fast — there are, of course, many things to consider when choosing a fund besides fees. But for the sake of argument let’s say that fees is your highest priority. In that case, we have not yet dug to the depths of how cheap funds can be.
Enter the world of negative ownership cost (NOC).
CEFs and NOCs
Since many CEFs trade at discounts to net asset value (NAV, or the value of the assets in their portfolios), there are some easy ways to buy CEFs whose discounts are so large that the fund’s total fees become negative.
We discussed the math behind this in a November 6 Contrarian Outlook article, so let’s jump to the good part: a portfolio of three CEFs with negative ownership costs.
Source: CEF Insider
First, there is the BlackRock Enhanced Global Dividend Trust (BOE)which yields 8% at this writing and sports a 14.6% discount to NAV, -0.3% cost of ownership and a diversified portfolio of bonds issued by governments and companies around the world.
Source: BlackRock.com
With bond yields as high as they are, these bond bets are already paying off, and higher net investment income is supporting BOE’s dividend. This is because BOE is turning its portfolio into newer, higher-yielding bonds, boosting the income it can pay out to shareholders as dividends.
Our second fund is the BlackRock Science and Technology Term Trust (BSTZ), which is an even better deal for investors, thanks to its huge discount to NAV–20.6% as I write this–and its -0.34% net cost of ownership. This one also gives 7.7%.
Big Sale, Probably Ending Soon
The chart above is a clear snapshot of a CEF buying opportunity: at mine CEF Insider service, we love to buy more CEF when it’s still deeply discounted, but that discount has momentum (or it’s quickly moving to par. You can clearly see that here.
We also like BSTZ because it is managed by BlackRock, the world’s largest asset manager – and that opens doors for us. As you would expect from a tech fund, BSTZ gives us positions in companies like NVIDIA (NVDA), Synopsys (SNPS), whose products help with the design of semiconductors, and Tesla (TSLA).
But BSTZ also invests in privately held techies — including those in the AI space — that individual investors like you and I can’t normally buy a piece of.
These companies can take off when they finally go public, but of course they also carry risks. This is why we trust BlackRock, with its unlimited research resources, to navigate this market for us and get us into the best private equity firms. That, in addition to the discount, dividend and NOC, makes BSTZ a worthwhile addition to your portfolio’s technical allocation.
Our third fund yields a whopping 11.6%, which is impressive in itself. But its discount to NAV is so far off the charts that I’m frankly surprised this deal is on the market.
The Highland Opportunities and Income Fund (HFRO) sports a -1.21% cost of ownership and 37.3% discount to NAV (You read that right!), setting it up for a price up to its huge performance. (We’re essentially buying the HFRO portfolio for 63 cents on the dollar here.)
HFRO also stands out for its asset class: senior loans; after the interest rate in the past two years, these loans were oversold, and HFRO was very oversold on top of that, hence the outsized discount. Which is a chance today.
Recently, the market continued to test lower and lower HFRO prices until it hit a post-pandemic low. That’s when it spiked up, providing a similar “moment-plus-deep-discount” entry point as we just discussed with BSTZ.
The HFRO Sale has ended
Taken together, you can see how looking at the income streams, fees and discounts of CEFs gives a holistic perspective on how these funds not only get passive income quickly, but also price improves.
How We’ll Bag 8%+ Returns, “Discount-Driven” Gains From CEFs (for Years and Years)
Bagging 8%+ dividends and 15%+ price gains in CEFs is all about track nuances like NOC and the “discount momentum” we just discussed. Both are signs that a CEF could have a place in your retirement portfolio.
But these are difficult indicators for you to find yourself, which is why we launched ours CEF Insider service. With a (deliberately) small group of members, we cancel the high-yield CEFs that are the key to a “dividend-only” retirement, funded only by payouts.
To help you figure out if CEFs are for you, I’d like to invite you to take a risk-free 60-day trial for CEF Insider today. When you do, you’ll get instant access to our full CEF Insider portfolio (average return: 9.8%), a complete library of Special Reports showing you the nuts and bolts of CEF investing, and much more.
Click here and I’ll explain my full CEF investment strategy, including why these “hidden” funds never get any attention from Wall Street and the mainstream press. Near the bottom of that investment briefing, you’ll have an opportunity to sign up for your risk-free trial for CEF Insider.
I look forward to showing you the best CEFs for big returns and upside over the next 60 days. Don’t miss out!
See also:
• Warren Buffett Dividend Stocks
• Dividend Growth Stocks: 25 Aristocrats
• Future Dividend Aristocrats: Close Contenders
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.